How far will gold and silver fall?

No usury on money would benefit everybody except for the moneychangers! :hail:

 

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And smart people have already devised a number of alternatives to interest.

 

Well I don't know how it's going over in the states but I can tell you now that here in the UK we're facing pay freezes or pay cuts, in both private and public sectors. As I work in education which falls into the public sector, i've had a pay freeze which will last for the remainder of this current govt, so I'll receive the exact same wage in 2015 that i'm getting now (as long as I'm not laid off in the next round of cuts), to add further to this we now need to deduct more from our wages to fund the pensions crisis, so in effect my pay after deduction is going to drop. In addition to this inflation is continuing at around 4% a year and prices are rising all the time. It might explain why loss in value of nominal currency is an issue to me!

 

While fiat currency can cause inflation, non-fiat currency does not automatically solve it either. Inflation occurs whenever demand exceeds supply over an extended period. Just look at Spain's experience from 1500-1700 (when gold and silver flowed into the country from the New World, but very little growth occurred in the local economy).

If you want to tame inflation, the trick is to grow the economy at a faster rate than the money supply grows. It goes back to the whole gold-lenders model of how money can be created from thin air.

Let's say you have a bank vault with 100 oz of gold in it. You can lend out that gold for 5% interest, and a year later, you'll have 105 oz of gold. One of your neighbors asks if they can store their 100 oz of gold in your vault, and you say sure, but it will cost them 1 oz of gold per year and they have to give you 12 months warning before withdrawing it. So, in year two, you start out with 106 oz of your own gold and 99 oz of your neighbors gold. You lend it all out again at 5% interest, and at the end of the year, you have 116 oz of your own gold and 99 oz of your neighbors gold. 15 oz of gold just 'appeared' out of thin air.

This is a pretty simple micro-model of how investment banking works. But, when you have a currency involved (fiat or otherwise), then the issuing authority has to produce new currency in enough quantity to meet demand.

Investing money in productive enterprises creates value. If the money supply didn't grow, then whenever an economy did more production than consumption, we'd see deflation (and vice versa).

To get back to the original question - I expect to see silver test the $5 price point again in my lifetime. I believe that we are in the midst of a bubble, and that the lack of profitable alternatives is part of why precious metal prices have skyrocketed so high. If stocks start offering believable 10% dividends (or if CDs start offering 5% interest rates) then I think there will be a flood of money going from metals back into other investments.

 

You're confusing apples and oranges.

You can have more goods in an economy than currency to purchase them (after all, how often do people sell their houses or cars)?

 

Have you ever heard of something called the velocity of money?
http://en.wikipedia.org/wiki/Velocity_of_money

So, Farmer A now has $1000... he goes and buys some new overalls, gets new wheels for his tractor, and buys some fertilizer for his field. Now, that $1000 is in the hands of 3 different people... who can choose to go buy some corn with it from Farmer B, or do something else with it.

 

This is not the definition of inflation. Inflation can only occur when the money supply is increased. Otherwise, if the currency supply doesn't change then in aggregate, inflation can't occur no matter what the demand. Demand may cause a price increase of a certain item, then there is less currency available for something else. Aggregate inflation does not occur. This is a concept that several here don't get, but then again, we have had 70+ years of obfuscation on the matter.

 

Ahh, but they had to spend money to create or obtain the items they just sold to the farmer. After paying their bills, they won't have anything left to buy corn with. I limited my example to one item, very unrealistic, simply as an example.

 

The great news with regards to the price of any silver or gold is that it is affordable at $5, $20, $100 and so on. You can thank fractional sizes and gram bars. Besides, didn't one gram bars exist because of the high prices in the early 80's? It's making a huge rebound because of todays madness.

 

I've seen 1 gm bars (gold) mounted on a assay card. It's pretty small on its own. I think in some countries they are used like money.

 

If I'm not mistaken I think there's a vending machine in a Las Vegas casino that sells bars too.

 

The definition of inflation is an increase in the monetary supply (in excess to growth of goods and services). Demand exceeding supply just raises the cost of something, which in a fair system would cause the relative cost of other less desirable items to share the load for the drop in price to keep things balanced. The scenario you've described that requires inflation to account for interest is all the more reason why interest is inherently bad for the average person holding money. Having the money supply not grow, and thus deflation increases buying power and is good for the vast majority of people. You don't need to have more money in existence for one item to have more value than another. The value is a fraction of the total monetary supply based on worth, so if for example we could have dollars denominated in decimals we could feasibly have only one dollar in circulation and still function just fine. I agree that we will see $5 silver again at some point, but I do not see this happening until today's currencies are replaced by something else. If $500 of today's dollars becomes $5 of the new dollars, then $5 silver is still a lot of value. It's all relative, but I don't see how silver denominated in 2011 dollars could ever be $5. That would require a significant decrease in monetary supply which can't even begin to happen until the outstanding debt is paid off.

 

good luck to all playing the game

 

Not quite. It's important to have the proper definition of inflation. It is a change in the supply of money that is greater than the change in the demand for money. So if the money supply is stable and you have a systemic decline in demand for money, you will still have aggregate inflation. The first situation is the common one, but it is important to understand what inflation is because nobody knows what the future will bring.

 

And the original buyer didn't?

Let me recap your "example":

Farmer A and Farmer B each have a field full of corn. Consumer C has $1000, the only money in existence.

Consumer C pays Farmer A $1000 for all his corn. Now, Consumer C has a field's worth of corn, and, according to what you said in your post, Farmer B's field is worthless -- its "value drops to zero", because "the buyer" has no more money.

But Farmer A does. In fact, now he's got $1000, but no corn, and he's getting kind of hungry. So he goes to Farmer B and asks for some of his corn. ("Fatima told me it was free!")

Farmer B learns from Farmer A's mistake, and says, "Free? Yeah, right. I'll be happy to sell you some of my corn. You can buy half of it for $1000." Farmer A, over a barrel, agrees.

Now, I'm sure you can contrive some Twister-like position in which Farmer B's corn is still worth the "zero" you claimed, but to me, it sure looks like demand has driven its price up to $2000 per field.

Funny thing about money -- it can be used more than once. Your example seems to deny that.

 

I would call this retail banking and not investment banking. However you missed the most important difference between an asset based currency and a fiat based currency. In your example, another 15 ounces of gold has to be added to the system as you stated. What if this gold is never created? What happens then? In a fiat currency, more money can be created to cover the loss of the banker, but in an asset based system something else has to be liquidated to pay back the debt. This very control mechanism of asset based currencies would have prevented the dot.com bubble, then the housing bubble after that. Both were dependent upon Federal Reserve money printing.

The point being that investment banking only provides value for the investment banker. It does not create wealth. That 15 ounces of gold represents real wealth created by everyone but the banker, but the banker ended up with it. Beyond that, it adds nothing to the system and in fact creates bubbles and busts that keep growing to the point the economy explodes. Then governments are forced back to asset based currency. This has been repeated many times in history.

 

The worth of something is always and only the sales price at the time of sale. Farmer A can only pay, at most, $1000 for Farmer B's corn. Hence the worth of Farmer B's corn is now $1000. However, the worth of the original corn just dropped to $0. My original premise holds because now, the original corn has no buyer, so its worth is 0$. Thus the total value of all that corn is still $1000. This is a concept that many miss. I will restate it again. Worth of an item is only what it will sell for at the time in question.

This is why I contend that total worth of all assets in a system is limited to the total amount of currency in the system. It does not matter what people originally paid for an item, what they believe it is worth, or what they expect to get. Worth of an item is limited to available currency to purchase said item. Millions of people in this country are finding this out the hard way now that they have discovered the "worth" of their McMansion home purchased during the bubble is far less than the debt owed on it since there isn't enough real currency in the system to cover it. There are two macro solutions to the problem. The central bankers can release enough currency in the system to cover the valuation of all these homes, but then currency becomes worthless, or keep the currency in the system flat and these home's worth approaches $0.

Getting back to my original point I was responding to. There is not $50T worth of assets in this country if there isn't $50T available for someone else to purchase it. The above demonstrates why. The worth of an item is only what the current market can pay for it. Make a purchase on A, then the worth of B falls unless currency is added. It's as simple as that.

 

The OP's is " How far will gold and silver fall. ". In January of this year 2011 I listened to many an interview of well respected financial experts. Each and every one of them said that gold will reach $2000 per troy ounce by the end of the year. Their prognoses are looking very good from where I sit. And if Ben Bernanke announces QE today look out, $2500 per troy ounce might be reached.
After all of this when the economy stabilizes and jobs become more available the fall from $2500 down to $750 will be very fast i.e. weeks, IMHO. Silver will follow and
$15 per troy ounce doesn't seem far fetched to me. All this may take two or three years to occur. So we all have some breathing room.
zeke

 

No - actually - according to your scenario - all corn is worth $0.00 because not only does farmer A not have a buyer for his corn but neither does C. Also according to your scenario all money would then be worth $0.00 because Farmer A has it all and he doesn't want corn and there is nothing else to exchange it for.

 

Hi all, Lucy here. I am following this thread with confused fascination..and trying to understand/grasp each point being made. You are all really confusing the tar out of me, I must admit. Trying hard to make a model on paper, well the picture is fuzzier with each post! I've learned (here) that there no 'hard, fast' rules of thumb, that there are obviously several schools of thought. How to decide which school is right...well, I'm not sure yet. Each seems to be running bunny trails. You all certainly sound brilliant in your thinking (read: knowledge). I'm wondering why, if so, you have not all come to the same conclusions?

Now, someone posted back a page or so something about not letting a $100 dollar bill sit around (paper money), and that worries me. Is that true? I keep personally trying to make sure I keep a good bit of hard green tucked away, out of the bank, for the 'just in case' part of my overall plan. A smaller part, to be sure, of the big picture, but now, worrisome! Another poster said something intriguing...electronic transfer, paper money not really needed... Does that mean my paper money, me having it hard in hand, isn't really a good thing?

Fascinating thread, truly.

Regards,
Lucy

(I think farmer A did the right thing selling his corn when he could!)('Cuz what would he do with it when it began to run out of shelf life/ useful life?)